ABSTRACT
Working
capital has been found to be an essential ingredient for the survival of a
typical business organization. The way this is carried out could affect the
profitability or effectiveness of the firm. This study was undertaken to
investigate the ways company adopt to manage their working capital and the
possible effect on the firm’s efficiency and profitability. Three (3) companies
based in Port Harcourt were used as a study. Questionnaire copies were issued
to management staff of these companies. Responses from these questionnaire
provided the data for our analysis; Annual reports of these firms also provided
the secondary data. To give the study a scientific focus, four (4) hypotheses
were formulated and tested in the core areas of investigation. It was discovered
in the study that most firms depend on the use of cash budget to determine the
optimal cash to hold. Inability to use the cash models to determine the level
of cash to shift to marketable securities and the possible balance to maintain
at any particular period had rendered the working capital management
ineffective in these firms. Based on the findings of this study, we recommended
among others, that, firms in Nigeria should employ managers who are skilled on
the use of financial models so as to be able to apply the necessary tools in
the management of their working capital for effective result.
CHAPTER ONE
1.0 Introduction
1.1 Background of the Study
Working
capital is an essential ingredient for the survival of a typical business
organization (Ola 1982:89). Traditionally, working capital means a firm
investment in net currents assets, that is, inventories, cash, marketable
securities and accounts receivable.
Decision
relating to working capital and short term financing are referred to as working
capital management. These involve managing the relationship between firm’s
short term assets and its short term liabilities. The goal of working capital
management as to ensure that the firm is able to continue its operations and that,
it has sufficient cash flow to satisfy both maturing short-term debt and up
coming operational expenses.
Working
capital management entails short term decision generally, relating to the next
one year periods which are “reversible”. These decisions are therefore, not
taken on the same basis as capital instrument decisions (NPV, or related as
above). Rather, they will be based on cash flow and/or profitability. In this
context, the most useful measure of profitability is Return on Capital (ROC).
The result is shown as a percentage determines by dividing relevant income for
the 12 months by capital employed. Return on Equity (ROE) shows that the result
for the firm’s shareholders value is enhanced when and if the return on capital
which results from working capital exceeds the cost of capital which results
from capital investment decisions as above. (ROC) measures are therefore,
useful as a management tool in that they like short-term policy with long-term
decision making.
Guided
by the above criteria, management will use a combination of policies and
techniques for the management of working capital. These require managing the
currents assets, generally cash and cash equivalents
Cash Management: Identify the cash balance which allows for the
business to meet day to day expenses, but reduces cash holding costs.
Inventory Management: Identify the level of inventory which allows for uninterrupted
production but reduces the investment in raw materials and hence increase cash
flow.
Debtor’s Management: Identify the appropriate credit policy i.e. credit
terms which will attract customers, such that any impact on cash flows and
the cash conversion cycle will be off set by increases revenue and hence,
return on capital (or vice versa).
Short term Financing: Inventory is wealth financed by credit granted by
the supplier depending on the cash conversion cycle. It may be necessary to
utilize a bank loan (overdraft) or to convert debtors to cash through
“factoring”
The management hopes to achieve the following:
(a)
Management
of the monies of the firm in order to attain maximum cash availability and
minimum interest income on any idle funds
(b)
Obtain satisfactory
credit from suppliers
(c)
To enjoy
extension of credit during periods of cash shortage (Obara and Eyo, 2000)
(d)
The need
for cash management is to balance liquidity with profitability (Aborode,
2005:225).
(e)
Managing
inventory, in order to have optimal stock available at a point in time
(Aborode, 2005:225)......
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